CEE

The total supply of modern Industrial and Logistics stock across the CEE-17 capital city markets alone totals over 22 million m2 and well over 50 million m2 in total. From this supply, the current availability can be categorized as low, with the majority of markets recording vacancy rates of below 5% and the remainder under the 8-10% level. A high percentage of the new supply being constructed is on a build-to-suit basis, or in other words, with tenants secured in advance of commencement. Speculative development across the region typically has a smaller share of the pipeline, however, I&L properties also have the shortest delivery times compared to other sectors (assuming all permits are in place), taking just 6 months on average to complete a standard warehouse, as guidance. As mentioned previously, there are several factors that can influence demand for a market and the decision-making process. The CEE region is ideally located in the very heart of Europe at the intersection between East and West which also plays an important role alongside the physical geographical and topographical features of each country or location. The region has excellent access to the international transportation network, which includes road, rail, river, seaports and air terminals. Much of this infrastructure has undergone improvements over the last few years and will continue to develop going forward.

 

 

Demand from the I&L sector in the CEE region over the past few years has overall been strong and has been driven by the 3PL, retail and distribution sectors, followed by the light production, automotive and FMCG sectors. During the pandemic and looking forward, we do expect to see some changes to the order and volume of this demand with sectors such as e-commerce, data centres and specialist storage increasing their requirements. Despite this, the CEE region, and some countries in particular, have long industrial traditions and remain very attractive to manufacturers ranging from the full spectrum of automotive parts and final product producers, through to aerospace, metals and plastics, complex electronics, home appliances, food, beverages, pharmaceutics and medical equipment, to name just a few. While we expect e-commerce and other sectors to grow at a more rapid pace and drive demand through these challenging times, we also expect that over the longer term, we will also see greater demand from producers/manufacturers to bring back parts of their supply chain closer to Europe to mitigate certain risks that we have seen in the past few months.

 

So many unanswered questions remain about the future because we simply cannot accurately predict the longevity and impact of the pandemic. The first wave raised serious concerns as to how the I&L sector and the economy reacted to what was initially a health crisis. In brief, much of the global economy was crippled or put on hold while most of us retreated to the safety of our homes and purchased only essential items. Even this showed signs of weakness as certain goods and services are cross-border and the disruption to, possibly over optimized, supply chains were significant through production closures, border closures and so on. In future, this may mean that larger inventories are stored or produced closer to the end consumer which could also translate to greater demand for I&L space. Although some companies were able to adapt and recommence within a fairly short period of time, there were also casualties as consumers became reluctant to purchase higher value items, due to the uncertainty that was unfolding. This has left some industries limping, and only time will tell how they move forward, or not. None the less, many companies in the manufacturing sectors have long term strategies, partly due to the amount of time and investment required to get set-up. While the current situation is putting a hold on, or changing, certain plans, they are still thinking longer term and need to think carefully about how to spread the risk, as these are complicated operations and cannot be done overnight. To add fuel to the fire, there are also plenty of other factors at play that were in the headlines well before COVID-19 came on the scene. If economies and all things related worsen, governments will almost certainly have to intervene to protect their most valuable national assets and interests. The headlines we refer to are the various trade agreement disputes, BREXIT and all things EU related, not to mention the various challenged political elections and civil unrest that are bubbling away close to the surface. In summary, some industries and companies could be pressured to bring jobs and assets "back home", especially if Governments (the taxpayer) has been required to bail them out.

 

Through the pandemic we have recorded more demand for short-term leases to cope with additional demand however, typical lease lengths across the region range between 3 and 5 years for logistics and over 5 years for production. Logistics companies for example often have 3-year contracts with their clients so would prefer more flexibility however, we have also seen the end user taking longer term leases and having the logistics companies rotate instead. Build-to-suit facilities can be expected to command longer leases, often due to the additional investment put in by both developers and tenants.

Rents across the region have been largely stable, with growth recorded in the most sought-after locations, and where availability is limited. We expect this trend to continue, particularly as demand has been good and construction costs have also been on the rise over the past few years.

Typical headline rents across the region range between EUR 2.9 and 5.5 per m2/month although, markets in earlier stages of development can currently reach upwards of EUR 7.0 per m2/month.